The Battle for the Soul of Central Banking

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by Adam Richardson

 

“The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow

thomas jefferson central banks
Strong Words From Thomas Jefferson

private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered. ”

 

Samuel Kraigwest sent me an article this morning that serves as a reminder that the sound and fury of Central Banks worldwide represent a wildly dangerous environment for YOU, the sovereign global citizen.

 

What is your personal plan to deal with the fact that immensely large and powerful entities are fighting hard to control, manipulate, and violate through the power of printed currency?

 

Q Wealth Report offers actionable, personally tailored plans to protect and help you thrive even in these environments.  You aren’t without options, you aren’t without allies ..become a member today and take back what control you can!

 

 

 

The Battle for the Soul of Central Banking

By Samuel Kraigwest

Sheila Bair, the former FDIC chair and senior advisor to the Pew Charitable Trusts, says in an interview with The Daily Ticker that the low interest rate strategy promoted by the Fed to goose the economy is backfiring. “The Fed has got the best of intentions…but it’s counterintuitive,” she argues. “Low rates dampen the incentives to invest.” The Fed’s monetary policies have made it more difficult for banks to generate revenue, forcing them to seek profits in other ways, she notes. – Daily Ticker

Are interest rates too high or too low? All around the world, central banks are keeping interest rates low but Sheila Blair thinks this is the wrong prescription. According to Blair, low rates discourage banks from lending as they will not make a proper return on their investments.

This is a clever perspective and yet a damning one at the same time.

Should rates go up – and by how much? It is part of a larger problem that occurs when governments get into the business of regulating and creating money. Inevitably, the suspension of the marketplace brings into view the difficulty of setting the value and volume of money without the use of the Invisible Hand.

Yes, absent monetary competition, there is no way for a technocratic element, no matter how brilliant, to determine monetary strategies. Only monetary competition and the laws of supply and demand can explain that appropriately.

Nonetheless, the world’s massive monetary system continues to function along the lines of deliberate – determined price fixing.

Blair certainly has a point about low rates and their disincentives. But does she have a way of determine a “natural interest rate?” In other words, does she really know where rates ought to be – and if so, how would this system be implemented and what would it show? Here’s more …

The Federal Reserve has kept short-term overnight lending rates near zero since 2008 to encourage consumer and business spending. Economic growth has yet to return to its pre-recession levels and the latest GDP report showed that the economy grew at an annual rate of 0.4% in the fourth quarter of last year. The Commerce Department will release its first reading of Q1 GDP on April 26 …

 “It’s very difficult to make a loan of a multi-year duration because you have this very low interest rate on your balance sheet,” Bair explains. “That’s not good for business lending. Banks can make money in other ways – trading profits, investment banking fees, deposit accounts – other ways … that don’t necessarily help the economy.”

Business lending, not home refinancing, holds the key to the economic recovery, according to Bair. The U.S. needs to shift its economic priorities if a full recovery is to happen, Bair adds.

“Our economic policies are too much aligned with trying to revitalize the economy we had pre-2007,” she says. “To have a sustainable growth model for everybody, including banks, we need to get more jobs and we need to get real wages going up again.”

Bair would like to see the Fed increase rates but in a gradual and methodical manner so the market can adjust The Fed has reiterated that it will not reverse its strategy until unemployment falls to 6.5%. The jobless rate in March dropped to 7.6% from 7.7% in February.

OK, we can see from this that Blair has in mind increasing rates gradually – but to what?

This is the basic question that never gets answered, no matter how insightful an observation might be. Blair has a point about the necessity for higher interest rates, but notice please she does not say how much higher.

Low rates are inflationary – as money printing itself is an inflationary process. The result is inevitably price inflation, depending on the volume of money being printed. Higher rates would gradually leach away some of that inflation, but central bankers are afraid to raise rates for fear that current economic “green shoots” would be throttled.

Some bankers are worried about growth – while Blair makes the argument that the cure is now worse than the disease. Add to that the endless confusion about the significance and necessity for “natural rates” and it becomes clear that central banking policy around the world is a mess, and that economies reflect it.

Blair is right about interest rates; they ought to be higher. But monetary policy is in such a muddle that even when savvy observers like Blair come out with good points, larger issues intrude.

How high is enough, and how high is too high? And would higher rates now retard future growth because economies are still too fragile. These are significant questions and lead us to a deeper issue, which is whether monetary policy works at all. It is after all a form of priced fixing, and price fixing never works – not for goods, services, or even the money supply.

The 21st century is clearly one where the battle over monetary policy will loom large. In the 20th century, central banking expanded to over 150 and the Bank for International Settlements was created to supervise them. But as the results continue to disappointment, one can see a larger intellectual battle shaping up. The next decades will tell the tale.

Call the looming debate … “The battle for the soul of central banking.”

 

Samuel Kraigwest is longtime commenter on the markets who grew up in the US but now travels the world in search of promising investments and the ever-elusive “best martini.” Kraigwest is also a contrarian investor who uses all of his life experience and investment knowhow to communicate the hard-truths of 21st century global speculation. Please visit the following address for a no-risk sample of a global newsletter with which he is involved.  https://secure.viscountmedia.com/order/sales_nigel3.html

 

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